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7/31/2019 ValueXVail 2012 - Joe Cornell
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Spin-Off Research
Joe Cornell, CFA
Breaking Up is Good ToDoThe ABCs of Spin-Offs
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Why Spin-Off?
Spin-Offs are a source of significant marketoutperformance for investors
Spin-Offs often result in a higher aggregate
value for the constituent pieces
Studies conducted by a range of researchers,
from Penn State to McKinsey have
documented that spin-offs, on average,outperform market indexes
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Spin-Offs Outperform S&P 500Bloomberg Spin-Off Index up 9.1% Year-To-Date Versus 2.6% for S&P as of June 4, 2012
YTD 1-Year Life
BNSPIN^ Bberg US Spin-Off Index 280.9 9.1 -4.3 212.1 90.42
SPX^ S&P 500 INDEX 1278.04 2.6 -0.6 na 11830
ACCO ACCO BRANDS CORP 8.57 -11.2 7 5.5 0.97
AMCX AMC NETWORKS INC-A 37.08 -1.3 n/a -7 2.66
AOL AOL INC 27.11 79.5 31.9 15.3 2.54
BWC BABCOCK & WILCOX CO/THE 23.9 -1 13.6 3.2 2.83CFN CAREFUSION CORP 24.01 -5.5 14.6 20.7 5.33
FAF FIRST AMERICAN FINANCIAL 15.7 24.5 3.5 12.2 1.67
FBHS FORTUNE BRANDS HOME & SECURI 21.13 24.1 n/a 71.8 3.37
HHC HOWARD HUGHES CORP/THE 57.9 31.1 20.8 56.9 2.2
HII HUNTINGTON INGALLS INDUSTRIE 36.5 16.7 1.1 -12 1.81
MJN MEAD JOHNSON NUTRITION CO 78.15 14.1 18.5 96 15.93
MMI MOTOROLA MOBILITY HOLDINGS I 39.98 N/A N/A 20.7 12.14
MPC MARATHON PETROLEUM CORP 35.24 7.2 N/A -14.4 12.01
MSG MADISON SQUARE GARDEN CO-A 36.25 26.6 36.2 107.1 2.74
PSX PHILLIPS 66 29.92 N/A N/A -8.7 18.71
QEP QEP RESOURCES INC 25.32- -13.5 39.7 -13.2 4.52
TRIP TRIPADVISOR INC 41.02 62.7 N/A 48.2 5.51
WPX WPX ENERGY INC 14.1 -22.4 N/A -22.1 2.8
XLS EXELIS INC 9.75 9.7 N/A -14.3 1.82
XYL XYLEM INC 24.48 -4 N/A -6.9 4.54
Total Returns(%)*
Index Member@
Ticker Name Current Price Mrk Cap ($Bln)
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Types Of Spin-Offs
Type of Spin-Off
Spin-Off
Carve-Out
Split-Off
Description Example
Parent firm distributes
shares of the spun-off
subsidiary to parentshareholders
Cadbury Schweppes /
Dr. Pepper
Time Warner / AOL
Bristol-Myers / Mead
Johnson Nutrition
Citigroup / Primerica
Bristol-Myers / Mead
Johnson Nutrition
Sara Lee / Coach
Sell a portion or all shares of
subsidiary through an IPO in
the equity market
Parent companys shareholders
are offered shares of a
subsidiary in exchange for the
parents shares (exchange offer)
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Spin-Off
A parent distributes the stock of a subsidiary inthe form of a dividend
Following the distribution, the stockholders hold
stock of the parent and the stock of the company
that was spun off
Two independent companies exist where before
there was only one
A spin-off effectively removes the parent frommanagement and control of the subsidiary
Pure spins are tax efficient
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Carve-Out
Parent company sells some or all of the stock of
a subsidiary to the public in an IPO
The carve-out may pay a portion of the IPO
proceeds to its parent
Parent companies sometimes link subsidiary
IPOs and Spin-Offs (two step spin)
Parent would typically sell less than 20% Of
subsidiary to the public and then distribute the
balance of the stock to their shareholders in a
tax-free distribution (Example: Bristol-Myers
Squibb / Mead Johnson Nutrition)
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Equity Carve-OutsParent sells Equity in the New Firm to the Public (IPO) and creates a
New Publicly Traded Entity.
Parent
65%Carve-Out in
an IPO
10%
Subsidiary
25%
Parent
65%
Subsidiary
35%
A carve-out brings cash into the firm, whereas a pure spin-off does not.
Carve-outs disperse assets and ownership in the assets to non-owners of
the original firm.
Carve-outs are often an intermediate step before a full spin-off.
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Split-Offs
In a split-off, the investor must decide between the newcompany and the parent.
Holders of the parent company stock must choose tocontinue owning stock in the parent or, instead, exchangesome or all of the parent stock for stock in the spin-off.
The parent offers its existing shareholders stock in thesubsidiary in exchange for shares in the parent company.
If the parent distributes 80% of the subsidiary stock, thesplit is tax-free. Whats more, in an effort to induce enoughshareholders to swap stock, investors are offered shares inthe subsidiary that are worth more than the shares beingreturned to the parent company. This offered premiumexplains why split-offs are often oversubscribed.
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Selected Split-Off Transactions
Parent/Sub DateSize
($mm)
% ofParentShares
Repurchased
InitialPrem.
ClosingPrem.
OverSub.
Factor
Sub as %of
ParentMarket
AT&T / AWE 5/21/01 $7.8 B 10% 7% 1% .87x 22%
Sara Lee / Coach 4/4/01 $998 M 5% 12.90% 6.90% 2.1x 6%
General Motors /Hughes Electronics 5/19/00 $8.27 B 14% 17.70% 10.10% 3.9x 70%
DuPont / Conoco 8/6/99 $11.7 B 13% 17.90% 3.30% 2.4x 20%Lockheed Martin /Martin Marietta 10/18/96 $906 M 4% 17.50% 5.20% 5.4x 6%
Eli Lilly / Guidant 9/18/95 $1.55 B 6% 13.10% 8.80% 2.9x 9%
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Drivers for Spin-Offs
Lack of synergy
De-conglomeration
Focus in core business
Legal / regulatory
Undervalued assets
Monetize value of
subsidiary
De-leverage balancesheet
Riskiness of the
subsidiary
Avoid a takeover
Tax avoidance
Conflicts of interest
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Successful Spins
Easier for the markets to recognize underlyingvalue
Pursue compelling business opportunities
Greater freedom to pursue new ventures,
streamline production, and pare overhead
Accountability and direct incentives (stock &options)
Eliminates competitive disadvantages Greater access to capital
Increase corporate focus for the spin-off and
parent
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Shift from Conglomeration to
Pure Play
Era of conglomerate (1960s - 1980s)
- Firms diversify holdings to smooth earnings
- Market rewards empire building
Conglomerates fall out of favor- Focus on cost
- Difficult to value all businesses in diversified companies
- Market discounts conglomerate stocks
Rise of the Pure Play (1990s - Current)
- Market rewards firms that concentrate on core business
- Competitive landscape pressures management to improveoperating efficiency and clarify strategic decision making
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Number of Completed U.S. Spin-Offs
by Year
19
27
21
34
27 27
18
23
33
28
31
41
36
44
66 66
39
41
21
35
27
31
34
29
20 20
27
0
10
20
30
40
50
60
70
1
985
1
986
1
987
1
988
1
989
1
990
1
991
1
992
1
993
1
994
1
995
1
996
1
997
1
998
1
999
2
000
2
001
2
002
2
003
2
004
2
005
2
006
2
007
2
008
2
009
2
010
2
011